INTORDUCTION• Historically, financial crisis tend to lead to sharp economic downturns, low government revenues, widening government deficits, high levels of debt, pushing many governments into defaults. This is called SOVEREGIN DEBT CRISIS.• GREECE is currently facing this, it accumulated high levels of debt during the decade before the crisis, when capital markets were highly liquid. As the crisis has unfolded and there was liquidity crunch in world economy, Greece may no longer be able to rol over its maturing debt obligations• The Eurozone is facing a serious sovereign debt crisis. Several Eurozone member countries havehigh, potentially unsustainable levels of public debt. Three—Greece, Ireland, and Portugal—haveborrowed money from other European countries and the International Monetary Fund (IMF) inorder to avoid default. With the largest public debt and one of the largest budget deficits in theEurozone, Greece is at the center of the crisis. The crisis is a continuing interest to Congress dueto the strong economic and political ties between the United States and Europe.
Build – Up To The Current Crisis• Between 2001-2008, Greece reported budget deficits averaged 5% per year, compared to Eurozone average of 2%.• Also, its current account deficits averaged to 9% per year compared to Eurozone average of 1%• Greece funded these twin deficits by borrowing in international capital markets, leaving it with chronically high external debt (115% of GDP in 2009)• Some of the facts which can be depicted from following charts
Debt And Deficit Indicators, Selected Countries
Reasons For Current Economic Situation• WORLD ECONOMIC CRISIS The income and savings had a downward trend worldwide after the subprime crisis unleashed. This has educed Revenues for the country. The world market had started recovering but we can say they are now in bullish run, these haky Stock Marketshad a cumulative effect. The reduced savings and lack of confidence among investors has resulted in lower Investment Flows After the sub-prime bubble burst, tricter requisites or bank loans / higher ateshave been followed globally. This all had a cumulative negative effect as; There was a Drop of tourist arrivals. Also, Negative impact on exports and international sea transport
• SPECULATION As Euro was the second best Foreign exchange reserve currency (with approx 25% holdings), there was increased Hedge funds betting against Greece / Euro Numerous negative media reports stating the financial status of the country had pushed it towards the danger zone. Unclear messages by foreign officials / executives have further added fuel to the situation. The 3 biggest rating agencies downgraded Greece, Greece’s rating with Moody’s stands at A2 and with Fitch and S&P two notches lower at BBB+ The borrowing rates for Greece skyrocketed.
Reasons For Current Economic Situatio• The 3 biggest rating agencies downgraded Greece, Greece’s rating with Moody’s stands at A2 and with Fitch and S&P two notches lower at BBB+.• The borrowing rates for Greece skyrocketed.• Euro was hit as fears for crisis expansion in other European countries including Portugal, Ireland, Italy and Spain (“GIIPS”).• And so the whole Eurozone was put to test.• The panic grew worldwide, when the Greek economy makes up only 2.7% of the Eurozone GDP and 3.9% of its debt.
• COUNTRY’S STRUCTURAL PROBLEM Excessive Expenditures : Over the past 6 years, while the government expenditures increased by 87%, revenues grew only by 31%. Mismanagement : In 2009, Greek government expenditures accounted for 50% of GDP. A continuous over-staffing and poor productivity in the public sector was encountered. Unregulated Labor Market : Greek industry is suffering from declining international competitiveness. Wages in Greece have increased at a 5% annual rate since the country adopted euro, while exports to its major trading partners during the same period has grew only by 3.8%. Obsolete Pension System : An ageing population (aged over 64), in Greece is expected to rise from 19% in 2007 to 32% in 2060 ould place additional burdens on public spending and what is widely considered as one of Europe most generous pension systems, as entitlement to a full pension requires only 35 years of contribution, compared to 40 in many other countries.
Impact On Global Financial Market• CONTAGION If Greece defaults, there is a risk of contagion to other Southern European countries, including “GIIPS”), for example, that the low levels of national savings in Greece and Portugal put these countries in the weakest financial position, at 7.2% of GDP and 10.2% of GDP respectively, compared to an EU average of approximately 20%.Complex Financial Instruments & Financial Regulations
• COMPLEX FINANCIAL INSTRUMENTS & FINANCIAL REGULATIONS Greek governments had successively, underwritten by prominent financial institutions including Goldman Sachs, used complex financial instruments to conceal the true level of Greece’s debt, for example, the government is alleged to have exchanged future revenues from Greece’s highways, airports, and lotteries for up-front cash payments from investors. Likewise, it is reported that the Greek government borrowed billions by trading currencies at favourable exchange rates. Because these transactions were technically considered currency swaps, not loans, they did not need to be reported by the Greek government under EU accounting rules.
European Integration“GREECES CRISIS HAS BROUGHT TO LIGHT IMBALANCES WITHIN THE EURO ZONE” Mismatch between the EU’s advanced economic and monetary union and an incomplete political union. Even within the economic areas, where the EU is more tightly integrated, the Euro zone has a single monetary policy but 16 separate (if loosely coordinated) national fiscal policie
Major Implications & Reasons For U.S• LOSS OF INVESTORS CONFIDENCE – Many expect that if investors lose confidence in the future of the Euro zone and more current account adjustment is required for the Euro zone as a whole, the value of the euro will weaken. A weaker euro would likely lower U.S. exports to the Eurozone and increase U.S. imports from the Eurozone, widening the U.S. trade deficit
• LARGE FINANCIAL STAKE IN EU The United States has a large financial stake in the EU. The EU as a whole is the United States biggest trading partner and hundreds of billions of dollars flow between the EU and the United States each year
Major Implications & Reasons For U.S.• GLOBAL RECESSION The global recession has worsened the government budget position of a large number of countries. for example, some have argued that there are strong similarities between Greece’s financial situation and the financial situation in the United States. Like Greece, it is argued, the United States has been reliant on foreign investors to fund a large budget deficit, resulting in rising levels of external debt and vulnerability to a sudden reversal in investor confidence. Others point out that the United States, unlike Greece, has a floating exchange rate and its currency is a reserve currency, which alleviates many of the pressures associated with rising debt levels.
• IMBALANCE OF CURRENT ACCOUNT Imbalances between current account deficit and current account surplus countries within the Eurozone are similar to the debates about imbalances between the United States and China. These debates reiterate how the economic policies of one country can affect other countries and the need for international economic cooperation and coordination to achieveinternational financial stability
• U.S COMMERCIAL INTERES – Greek default could have implications for U.S. commercial interests. Although most of Greece’s debt is held by Europeans (more than 80%), $14.1 billion of Greece’s debt obligations are owed to creditors within the United States. Although not an insignificant amount of money, the relative size of U.S. creditor exposure to Greek bonds however is likely too small to create significant effects on the U.S. economy overall if Greece were to default. GLOBAL RECESSION IMBALANCE OF CURRENT ACCOUNTSU.S COMMERCIAL INTEREST www.capitalvia.com 12Global Research Limited
• DEPENDENCY OF INDIA TOWARDS OTHER NATIONS Although USA & India trade with Greeks is small but think about the American / Euro Real estate market and world financial crisis back in 2008. Like, back in the 70s & 80s the collapses in real estate prices in American and collapse of the American Savins and Loan industry had little impact on India because there was No ( or little) Indian IT & Back Office Outsourcing industry in 1981.
• ECONOMIC TRADE BETWEEN INDIA & GREECE As we have seen, Greece in reality has little economic trade with India .The bottom line is Indias economy is far more connected and dependent on European American & Middle- Eastern Countries than back in 1982. So another financial crisis in Europe will impact India
Major Implications & Reasons For India• SLOWDOWN IN OTHER COUNTRIES The Greece crisis has been viewed as the tip of an ice burg which will lead to another slowdown in growth from Europe which would impact India. The poor USA economy and decline in tax revenue is resulting in many financial problems. This too can lead to a decline in business for India. A slow down in China results in much less demand for commodities. A decline in commodities prices results in a decline of those markets dependent upon commodities like the middle-east, Brazil, Canada, Russia & Australia. The in turn will spend less buying the goods and services from India and other trading partners.
• EURO AS THE 2ND BEST FOREIGN EXCHANGE RESERVE World still holds the US-$ as the majority of their foreign exchange reserves, the Euro is a close second (about 25% of holdings) Since the world reserve currency also acts as the international pricing currency for oil, gold, and other products traded on world markets, the decline of the value and the confidence in the Euro could have a devastating impact on all aspects of global trading
Why Bears Were Powerful In Past Few Days..!!!!! Stock market is more depending on the behaviour and the expectations of investors in the market. What small corrections are coming in the market, are the repercussions of the European crisis that well understood, however, if you apply fundamentals it is quite evident that Indian companies having sound financial position, good order books, increasing profits, increasing sales and doing good business domestically or globally, will (has) definitelyhedge all these risk and in near time will be able to generate sizable earnings.tocks become more risky, not less, as their prices rise - and less risky, not more, as their prices fall he fact lies in the opamine Effecthich is created in the minds of the people forces them to think irrationally